A “Tight Oligopoly on Steroids” Costs Digital Communications Consumers $60 Billion a Year in Overcharges

Washington, D.C. – At a hearing on the ATT/Time Warner Entertainment (TWX) merger in the Senate Antitrust Committee, the Consumer Federation of America released a report that shows four firms (ATT, Verizon, Comcast and Charter) dominate all four major digital communications product markets (wireless, broadband internet access, video, and business data services). The result is a “tight oligopoly on steroids,” that is abusing its market power to overcharge the typical household (with two cell phones, video and broadband) about $45 ($540 per year). This represents almost one quarter of the household communications expenditures. The report shows that the total overcharges (almost $60 billion per year) result in a massive waste of resources that are spent in mergers and acquisitions accumulation of liquid assets and excessive dividends.

“Stockholders love the astronomical rate of return, but consumers hate it,” said Dr. Mark Cooper, CFA’s Director of Research and the author of the report, “which is reflected in the very low ratings that these products get in consumer satisfaction surveys.”

“Our report highlight three themes from the recent election – pocketbook populism, concerns at big media, and the anti-merger position taken by leaders in both parties,” Cooper noted. “This is a key test of whether there is a genuine commitment to address these problems. Rejecting the merger will be an important step in stopping the growth of the tight oligopoly on steroids, but there will still be a lot of work to do to control the abuse of market power by the dominant communication giants.”

By traditional economic standards and current antitrust practice, these markets fit the classic definition of a tight oligopoly. All are highly concentrated markets and the top four firms have a combined market share well in excess of 60%. The report shows that the market power of this tight oligopoly is magnified (on steroids) by several factors.

From the point of view of market structure,

The same four firms dominate all the markets.

They failed to compete with each other in the core franchises service territories in which they had been granted monopolies prior to the Telecommunications Act of 1996. Cable companies never overbuilt other cable companies. Telephone companies never overbuilt telephone companies. Cable never went into wireless. Telephone companies were slow to enter video.

Costs have been declining rapidly. This creates more surplus that service providers can capture as excess profits in the absence of vigorous competition.

As a result, these firms enjoy a significant degree geographic separation, technological specialization, and product segmentation that enables them to dampen head to head competition.

From the point of view of supply-side conduct,

Their behavior reinforces their market power with significant efforts to collaborate in the distribution of services and in lock step support of public policies that preserve their market power.

They engage in parallel, anticompetitive contracting terms and conditions when they sell network services in their home service territories.

When they buy services outside of their home territories their business practices reflect reciprocity that freezes out competition.

On the demand side, the potential for abuse of market power has grown because consumers cannot easily exercise choice.

These services have become necessities with low elasticities of demand and moderate income elasticities.

Differences in the technologies and functionalities of the services make them complements, rather than good substitutes.

High switching costs make it difficult and costly for consumers to change suppliers in the small number of cases where they do have a choice.

The services are frequently bundled.

“The harms inflicted by the tight oligopoly on steroids are not limited to its anticompetitive and anti-consumer impact,” Cooper added, “we also show that it undermines important social goals like universal service and protection of consumer privacy online.”

“All of the negative aspects of the tight oligopoly on steroids come into play in the ATT-TWX mergers. In many respects ATT is the dominant player in the tight oligopoly, with a strong position in wireless, business data services and video distribution. Allowing it to acquire a major content producer would give it much stronger incentives and an enhanced ability to leverage its market power to harm consumers and competition.”

“The merger would provide a powerful tool to dampen competition in the two areas of the digital market that have shown the best hope for the growth of competition – wireless and online video. By favoring its products with bundles and discriminating against potential competitors, it would weaken competition.”

“Any short term gains it offers to consumers would quickly evaporate as ATT reverts to its strong pattern of anti-competitive, anti-consumer pricing and practices.”

“Throughout this analysis we find ATT as one of the most vigorous defenders of the tight oligopoly and abusers of market power. Our historical analysis shows that the incentive and ability to exploit vertical leverage over content, which ATT would acquire as a result of this merger leads to rapid and severe abuse of market power.”

“The ultimate harm may be to trigger a merger wave in which each of the other dominant firms would be forced to integrate vertically. If the responsible authorities don’t say no to this merger, we are likely to see all of the major content producers gobbled up by the dominant communications giants.”

“Our analysis shows that over the past half dozen years, the antitrust and regulatory authorities have built up the analytical and legal basis for rejecting mergers like this, consistent with broad consensus that this merger would harm consumers and the economy.”

“While rejecting the merger cannot fix the bigger problem in digital communications markets, it would be step in the right direction and a signal that Washington policymakers are serious about addressing the severe pocketbook harm that the tight oligopoly on steroids imposes on consumers,” Cooper added.

Contact: Mark Cooper-301-384-2204

The Consumer Federation of America is an association of more than 250 non-profit consumer groups that, since 1968, has sought to advance the consumer interest through research, education, and advocacy.